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IMF Flags Housing, Competitiveness as Canada Economy Risks

(Bloomberg) -- Canada should reconsider how it taxes corporations to make sure they remain competitive after U.S. tax reductions, the International Monetary Fund said.

The Washington-based group made the recommendations Monday in its annual review of the Canadian economy. The report also said the existing set of regulations aiming to curb housing risks seem to be working, but cautioned policy makers should be prepared to do more if needed to keep the economy on track.

With the report, the IMF is wading into a controversial debate in Canada over how to respond to President Donald Trump’s decision to cut U.S. corporate tax rates. While the federal government has said it’s evaluating the impact of the tax cuts on the nation’s economy, Prime Minister Justin Trudeau argues the nation’s economy remains competitive.

“It is time for a careful rethink of corporate taxation to improve efficiency and preserve Canada’s position in a rapidly changing international tax environment,” the IMF said.

The economy’s current strength won’t be sustained, the IMF said, predicting growth to slow to 2.1 percent this year from a Group of Seven-leading 3 percent in 2017. Medium-term potential growth will be even slower at 1.75 percent because of a loss of competitiveness and an aging population, the IMF said. Total output could be reduced by another 0.4 percentage points if North American Free Trade Agreement talks fail and Canada-U.S. commerce reverts to World Trade Organization rules.

Other IMF Recommendations

Federal and provincial governments must find ways to keep Canada competitive while also curbing budget deficits.

The Bank of Canada’s monetary policy approach of gradual tightening is appropriate as inflation pressures build.

“If housing vulnerabilities continue to rise, new lending by banks should be subject to loan-to-income limits,” the IMF said. Regulators must “mitigate other potential and emerging risks to financial stability, including the increasing use of home equity lines of credit, the rise of less regulated mortgage lending, and the rapid growth in exchange-traded funds.”

“Hold off on the macro-prudential measures for the time being, because the market is softening,” Cheng Hoon Lim, the IMF’s mission chief to Canada, said about the housing market in an interview. She also said boosting the supply of housing would be helpful.

Deregulating industries such as electricity, transportation, retail distribution and professional services could attract foreign investment and blunt the impact of U.S. tax cuts.